European Union leaders set aside their differences over Iraq yesterday to focus on economic reform and the downturn affecting Europe's economy.

While most attention focused on the frosty relationship between the French president, Mr Jacques Chirac, and Britain's Mr Tony Blair, the leaders promised to make a reality of the aspirations mapped out in Lisbon three years ago.

In a joint statement, the leaders said that the EU had made "considerable progress" on the goals set at Lisbon, including: freeing up energy markets, single air-traffic control, modernised competition policy, EU-wide financial markets and EU-wide patents.

But they acknowledged that much remained to be done and warned that the war in Iraq was casting a shadow over the European economy.

"The European Union is currently facing a slowdown in growth. Economic uncertainties and global political risks weigh heavily on the short-term outlook and have delayed recovery," they said.

In an old-fashioned display of Brussels brinkmanship, Italy blocked a long-sought deal on savings tax after other countries refused to reduce fines imposed on Italian farmers for over-producing milk. Germany led the condemnation of the Italian action, which the finance minister, Mr Hans Eichel, described as "unacceptable".

"It is unacceptable to tie such an issue together with a tax package on which we have worked for six years," he said.

Mr Chirac complained that, on a day Iraq was being bombed, it was inappropriate to be talking about milk.

The savings tax proposal would have created common rules for the taxation of savings held by EU citizens in another EU member-state, potentially netting countries such as Germany billions of euros in reclaimed tax revenue.

Italy criticised the savings plan, saying it failed in its goal to break down banking secrecy in and outside of the EU. Under the plan, countries such as Luxembourg and Switzerland can keep secrecy rules in return for higher tax on income from savings. The prime minister, Mr Silvio Berlusconi, said failure to resolve the issue of milk quotas could cause serious unrest in his country.

The leaders agreed to adopt a plan to reform the voting system on the European Central Bank's governing council that would create a rotating system, giving bigger states a greater say in setting interest rates. But following objections from Finland and the Netherlands, they agreed that the issue could be revisited later.